Vietnam’s National Financial Supervisory Commission claims the central bank should fight liquidity issues by pumping money into the banking system.
Experts agree the banking system is bleeding, but the best course of treatment is open to debate
However, experts are warning this is nothing but a quick fix. The influential commission (NFSC) proposed using the “central bank’s direct refinancing” to increase the banking system’s liquidity at an economic conference held by the body last week in Hanoi.
The measure is one of a range of policies put forward by the body to help the banking industry deal with liquidity issues seen as a key problem for the Vietnamese economy in 2012.
“The first and most pressing task is pumping money to resolve liquidity problem in struggling banks. We see it as an urgent measure that must be done for the short-term,” said NFSC vice chairman Le Xuan Nghia.
According to the proposal, this liquidity increase would be conducted “in a rational manner,” with credit mainly flowing into the agriculture and export-earmarked production sectors, small and medium enterprises and certain segments of the real estate sector.
Capital for the securities and real estate investment and consumption – seen as bearing inflation risks – would be strictly limited. In such a way, a liquidity hike would not have an inflationary effect, the proposal said.
The NFSC proposal comes at a tough time for the banking sector and is seen as a way of dealing with what the body sees as an utterly crucial problem for Vietnamese economy in 2012.
"There were cases where weak banks that had almost died but could not be buried, extending their lives until this year. There must be ways for them to completely die
- Nguyen Duc Huong
Vice chairman of Lien Viet Post Bank"
The banking industry’s loan to deposit ratio (LDR) in 2011 was estimated at 1.02-1.03, compared with 1.01 in the years 2010 and 2009, and 0.95 in 2008. Meanwhile, bad debts have soared to more than VND85 trillion ($4.1 billion), putting extra pressure on the banking system.
Some banks were mobilising at rates as high as 21 per cent – far from the 14 per cent cap regulated by the central bank – as they struggled to obtain funds to improve their liquidity, Nghia indicated. At the same time, many other banks were offering rates of 19-20 per cent.
“The key to Vietnam’s 2012 economy is banking liquidity. If we cannot resolve it, we cannot lower lending interest rates and so cannot increase assets. Without increasing assets, state-run enterprises’ equitisation and improvement in bad debts are all a waste,” Nghia noted.
The NFSC also proposed some other tools to improve bank liquidity, including raising the reserve requirement to facilitate the transfer of funds from major banks with redundant funds to ones that lack funds, and allowing banks to trade gold on accounts to gain cash. Private gold reserves are estimated to be about $5–7 billion.
The commission hopes to increase banking liquidity within the first quarter of 2012 – or within the first six months if conditions are unfavourable. This is to lower the interest rate by 4-5 per cent point, which they believe could reduce input costs for the whole economy by about $4.8 billion.
“There need to be an easing [in policy] to some extent,” said NFSC’s chairman Vu Viet Ngoan, adding State Bank of Vietnam was likely to apply those technical tools to improve banking liquidity.
However, the NFSC proposal met with strong criticism from banking industry insiders. Most implied that continuing the tightened monetary policy was necessary to eliminate weak banks, particularly given the central bank was aiming at restructuring the banking industry.
“If we allow banks to sell gold or pump more money into the banks, what will happen? Money will flow into the securities market and real estate market, which now need a lot of money to pay off huge debts, not into producing,” said Bui Ngoc Son from the Institute of World Economics and Politics.
Son argued that the regime of money supply between banks and securities and real estate markets was “rash.” Nguyen Duc Huong, vice chairman of Lien Viet Post Bank, stressed that the consequences would be “very serious for the future”.
Huong criticised policy easing as an attempt to keep weak banks alive in the short term. “There were cases where weak banks that had almost died but could not be buried, extending their lives until this year. There must be ways for them to completely die,” he added.
The interbank market is experiencing unprecedented disorder caused by falling confidence. For the first time in the Vietnamese banking industry's history, lending in interbank market requires mortgages.
Bad debt of the whole industry at the end of 2011's second quarter mounted to VND71.6 trillion or $3.46 billion (up more than VND20 trillion against the end of 2010 and 45.1 per cent on-year).
The average speed of the bad debt growth in 2011's first six months was 7.3 per cent per month, or double that of 2010. The ratio of non-performing loans to total outstanding loans also soared to 2.88 per cent by June 2011 and is reaching 3.39 per cent, or 1.2 per cent up against the end of 2010.
All debt groups are trending upwards. In particular, the ratio of the fifth-group debt - the uncollectible debt- has exceeded 50 per cent of the total bad debt. Capital adequacy ratios (CARs) are tending to fall. The ratio for the overall banking industry was 11.97 per cent as of June, 2011, down 0.16 per cent point against December 2010.
The number of banks that failed to meet the required minimum CAR of 9 per cent significantly increased to 17 of a total of 42 banks at the end of 2011's third quarter, compared with just two banks at the end of second quarter of last year.
By Hai Trang